Know the Numbers: When you buy a home, it’s all about the numbers and the choices they afford you. Your credit scores, income to mortgage debt, income-to-debt, and down payment can all affect your mortgage interest rate, or how much it will cost you to borrow money to buy a home.
Know Your Credit Scores: Your credit score can be between 300 and 850. Compiled by credit bureaus and FICO, an analytics corporation, credit scores are a snapshot into your credit-worthiness. Lenders are in a low-risk mood and are requiring high credit scores from borrowers. To qualify for the best mortgage interest rates – the benchmark 30-year fixed rate – your credit scores must be approximately 720 or more. To find out what your credit scores are, visit annualcreditreport.com, where you can get free copies of your credit report and scores.
Know Your Income to Debt Ratios: To qualify for a 30-year fixed rate conforming loan that is insured by the Federal Housing Administration (FHA), your income to mortgage debt ratio can be no higher than 29% of your gross annual income. For example, if you make $5000 gross income per month, your house payment (principal, interest, hazard insurance and property taxes) should be no larger than $1,450.00. If you’re carrying credit card debt, student loans, or pay child support, the monthly debt service must be accounted for. To get the income to total debt ratio, multiply your monthly income by 41%. For example, if you gross $5000 per month, your total debt (including your house payment) can be no larger than $2050. That means to qualify for a $1450.00 house payment, your debt service can be no higher than $600 per month.
Know Your Down Payment: For most loans, your credit scores affects down payment requirements. If you have a high credit score, you can get an FHA-guaranteed loan with only 3.5% down, but if your scores are low, you may be required to put as much as 10% down. Conventional loans are sold by banks as securities to Fannie Mae and Freddie Mac, and require a 20% down. You can obtain FHA or conventional loans with less money down, but expect to pay a mortgage insurance premium, which reduces the risk for the lender.
Where your down payment originates also makes a difference to lenders. If you have saved the money yourself, or it comes from a recent real estate transaction, lenders tend to be more relaxed than if your parents are giving you the money as a gift. Your credit scores, income to debt ratio, and down payments dovetail together in a way that makes sense to your lender. By determining these numbers, you can comfortably afford the home you want to buy.
